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An objection to a settlement between Halifax County and Klausner II has been filed and challenges, among other things, the county’s ownership of heavy equipment and fixed machinery installed as well as a lien the objector says it has at the defunct sawmill outside Enfield.

The objection was filed in United States Bankruptcy Court in the district of Delaware by Carolina Sawmills LP, which court records show loaned Klausner $75 million to begin the project in 2014.

The objection says this is a three-party dispute among Klausner, the county and Carolina Sawmills over the parties’ respective rights in the property.

The court document presents what is called five fundamental problems “that require denial of the settlement motion.”

It argues, according to basic principles of law, Klausner and the county “cannot use artful drafting in the settlement, and the low standard governing the approval of compromises under bankruptcy rule … to rewrite (a section) of the Bankruptcy Code.”

Likewise, the document says Klausner cannot use a section of the Bankruptcy Code and an allegation that the property is subject to a bona fide dispute for authority to sell the property fee and clear of Carolina Sawmills' lien.

Its second argument states that while the county and Klausner contend Carolina Sawmills’ lien on the property was eliminated by the filing of a reverter there is no court decree or order establishing this position. “In fact, the county filed the lawsuit against Carolina Sawmills to seek a declaration that its deed of trust was no longer secured by the property. Given the pendency of the lawsuit, and the fact that no court has determined the parties' respective interest in the property pursuant to an adversary proceeding under (bankruptcy rules) or pursuant to the lawsuit the debtor and the county cannot eliminate Carolina Sawmills lien on the property by their own private agreement. The impairment of Carolina Sawmills rights under the deed of trust is not fair and equitable, and the elimination of Carolina Sawmills lien is unduly prejudicial to the company.”

Carolina Sawmills contends it has a lien on fixtures pursuant to its properly filed deed of trust. “Accordingly, any of the scheduled personal property set forth … to the settlement which constitute fixtures under North Carolina law are subject to (the) Carolina Sawmills lien, since the county acknowledged in the settlement that it has no interest in the scheduled personal property, and therefore such property would be unaffected by the filing of the reverter.”

Says the objection, “These fixtures are undoubtedly the debtor s most valuable assets, since the heavy equipment and machinery affixed to property are the heart of the sawmill. The settlement's impairment of Carolina Sawmills lien on fixtures is not fair and equitable and the elimination of its lien on fixtures is unduly prejudicial to the company.”

In its fourth argument, Carolina Sawmills says its liens on the property and fixtures are critical to its recovery upon its secured claim. “As noted upon the record during the July 30th hearing before the court, the debtor waived Carolina Sawmills' contractual prohibition against credit bidding.” 

In the fifth argument Carolina Sawmills says “since the debtor and the county are trying to invalidate (its) liens through their execution of the settlement and not by way of an adversary  proceeding, the settlement  should be denied.”

On March 14, 2014, Carolina Sawmills and Klausner entered into a construction loan in which it loaned the Klausner $75 million to be used in the construction of the sawmill.

To secure the loan, Klausner executed both a deed of trust and a security agreement which the objection says is in favor of Carolina Sawmills. 

According to terms of the settlement reported last month, Klausner and the county have agreed to sell the property located off Highway 301 just outside Enfield for a minimum price of $11 million. 

Upon the closing of the sale, the proceeds will be distributed as follows: 

The first $1,500,000 to repayment of the debtor-in-possession loan or the debtor

The next $4,500,000 to the county 

Klausner was announced by former Governor Beverly Perdue in 2012 as an economic development project which would bring 350 jobs to Halifax County and represented what was to be a $130 million investment.

The motion by Klausner seeking approval of the settlement said the company was to be one of the first new sawmills built in the United States for some time. 

It was to use European technology “that would result in efficiencies of operations and production, and far greater utilization and less waste of raw materials,” and if successful would have brought a competitive advantage over domestic lumber mills. 

Construction of the sawmill began in 2014. 

Several setbacks and delays occurred during construction over the next several years, and the debtor’s sawmill never became fully operational, which caused a drain on liquidity, previous documents reviewed in the case show.